Recently, the US Commodity Futures Trading Commission (CFTC) has pretty much settled the argument on whether or not Bitcoin, the popular virtual currency, can be regulated. They filed charges against Coinflip Inc but did not impose any penalties and apparently was settled without anything being confirmed or denied. I am not saying that I expect to see Bitcoin futures any time soon but trading Bitcoin contracts on the CME would be pretty sweet (albeit unlikely). For more information on that, please go research with a few keywords on any search engine and you will pretty much find all the articles that are useful in this regard. I am not writing this to provide any insights and to argue whether or not the CFTC was correct in their decision making, rather, I wish to highlight the more prominent and less discussed (nowadays at least) topic of why Bitcoin is worth anything at all!

Though… I should just state my opinion, just for the record. I do agree that it is a commodity. Bitcoin is used more for investment than purchases. Most of the people either trade it or buy and hold similar to investment in equity or gold. Technically, you can also buy goods and services using gold at whichever store that finds it acceptable to take gold as payment (I dare say most would if you give them enough) but most regard it as something to hold (or wear, I don’t judge). This property is congruent to what we can observe for Bitcoins. Some very specific stores accept it as payment, while most prefer to buy it simply to hold (I have yet to hear of anybody wearing Bitcoin as bling so please inform me if you find some photographic evidence). All in all, I agree that it should not be considered as a currency due to (and I’m gonna give a few other examples that I’m too lazy to flesh out but should be fairly obvious. It is a certainly failure as a research student but I prefer to see it as a win for my laziness) the lack of liquidity, relative focus in investment purpose, and the small net value (calculated in the billions rather than trillions like mainstream currencies).

A lot of people marvel at how Bitcoin went from practically worthless to over $1000 to the now $200 per coin commodity (and I use that word in a very general sense). Ooh, I should mention that those values above are in US dollars. I live in Australia but I’m gonna try to give everything in terms of a better (read: more useful finance-wise) currency. It seems that people nowadays have all axiomatically accepted that Bitcoin is worth something. Where that comes from no longer seem to matter, or at least discussed in as much frequency as it once was.

Popular opinions include the underlying technology of the Bitcoin itself, the idea and innovative method and how much people treasure a cryptocurrency that gives anonymity in the current age of big data. This is one that I personally support as I believe that these all give value. A fundamental principle of business is that it must create value for its customers and clients. In the usual sense, this value can be reflected by the generation, or aid in generating wealth. However, Bitcoin offers something totally different. it doesn’t generate wealth, but allows wealth to be distributed anonymously and safely. Arguments for illegal uses aside, this makes a very interesting and very handy way for businesses to conduct transactions. Recently, 14 banking organisations (including Lloyds, Barclays, UBS, Commbank, Goldman etc.) are looking to invest in Bitcoin application and technology.

Some argue that the technology of Bitcoin can be applied to replace the current central clearing system of markets. This could be true given that the participants who now also have a new duty do not increase their prices to cover the additional cost, or raise prices simply because they’re providing a new service. Block chain and crowd verification is useful perhaps to fool HFTs, but that doesn’t seem likely either as the market requires transparency to function more efficiently (my PhD research may make me a bit biased in this regard but the evidence for this is too strong to simply ignore) so purely from the perspective of increased costs to the market, we cannot justify the block chain applications.

Alternative currency? What about using it as an alternative currency for places with political instability or high inflation? Well, Bitcoin isn’t really known for stability. There are also other currencies more suitable for these situations, like using the US Dollar for example. It is stable, it is big, and it is trusted by anyone who knows where the US is on an atlas. So this argument also breaks down right from the start.

“But wait!” You exclaim as you take a sip of scotch and readjusts your tablet and sitting position due to the fire from your fireplace starting to get a bit too warm (this is how I picture my audience…) “If Bitcoin can’t be used in the secondary market, and can’t be used as a currency, and is an unstable commodity, what on earth is it good for?”

A good question (as expected from my reader!). Well, it is the concept that decentralizes a clearing system that makes it so useful. The ability to remain anonymous while clearing transactions based on a general consensus (OK… I know I didn’t sell that well) is something that we can really use soon in the future where all our purchases will be recorded in the ‘big data’ one way or another. When supermarkets are emailing me discounts on feminine hygiene products because I went shopping with my girlfriend once or twice, it really makes you think. Maybe if I paid for her stuff with bitcoins rather than my card that is linked with my rewards card, I won’t get all the ads. Anonymity is, to borrow the slogan from Mastercard, Priceless. On the other hand… if we all use Bitcoins, think of the value that we miss out from the reward points and the chance to save 20% on tampons…

Think of the points people!